Economic indicators point to continued contraction

Some Leading Economic Indicators, LEIs, are pointing to a year-on-year contraction in growth in January 2016, which may see Nigeria’s economy returning a growth rate of less than one per cent in the first quarter, 2016, if the trend continues. But some other international reports indicate that the development is likely to be a global phenomenon though sub-sahara Africa and other commodity dependent economies which include Nigeria, may be worst hit.

The LEIs compiled by analysts at Nairametrics, signal a significant increase in the risk of recession, and are a pointer to the poor state of the Nigerian economy requiring urgent policy response to stimulate growth. Of the nine indicators traced, only two showed expansion or positive development while the rest seven were negative. For instance allocations from the Federation Account Allocation Committee, FAAC, a major determinant of public sector solvency across the three tiers of government, was down by 26 per cent y-o-y, signaling a significant reduction in the spending capacity of the various governments.

Obviously the above situation was a direct consequence of a downward trend in another indicator, international oil prices, which was down by 41 percent. Also, the value of the local currency, Naira went down massively with the exchange rate indicator showing a depreciation of about 51 per cent in the parallel market which is negative for consumers.

The Nigerian Stock Exchange, NSE, Index has lost 19 percent, while the cumulative effect on investors’ wealth from that has seen N1.7 trillion wiped off the market capitalisation of listed stocks. The LEIs listing also cited FBN Quest manufacturing Purchasing Managers Index, PMI, which tracks five variables of output, including employment, new orders, delivery times from suppliers and stocks of purchases, recorded a contraction in January 2016, compared to January 2015.

The PMI declined in the headline to 44.6 with four sub-indices in negative territory. A reading below 50 represents contraction or negative growth. The National Bureau of Statistics, NBS, had reported a continued inflationary pressure with the headline increasing to 9.6 percent in the period. On the positives the LEIs listed Private Sector Credit and the Broad measure of money supply, M2, growing by 3.3 and 6.8 per cent respectively. However, beyond Nigeria global reports point to creeping recessionary monster into most economies of the world.

Last weekend’s chat in CNBC, global financial medium, had noted that since corporate profits turned negative in mid-2015, Wall Street has pondered whether it’s just a passing phase or a signal of something worse with discussants indicating that historically the later may be the reality. Historically, recessions have followed consecutive quarters of earnings declines 81 percent of the time, according to an analysis from JPMorgan Chase strategists, who said they combed through 115 years of records for their findings.

Of the remaining 19 percent of the time, recession was only avoided through either monetary or fiscal stimulus. With the US Federal Reserve Bank holding limited easing options the prospects for help are not good. The warning comes amid a stock market hovering around correction territory and a mixed economic picture.

Citigroup, last week warned of escalating risk of a global recession, though data last Thursday on durable goods orders suggested the manufacturing sector may be shaking off a contraction phase. “Absent a pickup in consumption and further weakening in the U.S. dollar, we continue to see rising risk of earnings recession in the U.S.” JPMorgan’s equity strategy team said in a note to clients. Corporate earnings in the US and most part of the world including Nigeria, began to weaken significantly in the third quarter of 2015.

The drop became more pronounced in the nearly completed fourth quarter reporting season, which is likely to see a drop of 3.6 percent, and worst rate in Nigeria has already been reported. Worse, future estimates are declining, indicating the damage won’t end until at least the third quarter of 2016.

Despite the mounting problems, JPMorgan still only assigns a one-third chance of recession this year, though the probability seems to be rising. The firm said its Qualitative Macro Index measuring business conditions shows “a cycle that remains in contraction (weak and decelerating) over the coming months.” The index’s reading is consistent with a bear market 64 percent of the time and has been below the current level just four times since 1980, each occasion signaling a recession.